Frontloading
All bets are off
The week ends on a quiet note after some shocks propelled flat prices to peak on Wednesday at levels not seen since last August. However, as the week wore on and Inauguration Day approaches, it was expected that things would cool down a little. Despite this, two corners of the market—tankers and the Dubai benchmark—remain highly active.
OFAC sanctions triggered a chain reaction that spread from East to West, with most of the activity concentrated in the Middle East due to its proximity to major buyers like India and China. Both countries are scrambling to secure prompt barrels for March-April delivery before the sanctions take full effect after the two-month adaptation period. Rumors surfaced during the week that India and China collectively requested Saudis to pump an extra 700kbd, challenging OPEC’s production cuts. This could be the window Saudi Arabia has been waiting for to scale back cuts, albeit at the expense of its reliable partner, Russia.
Back-of-the-envelope calculations suggest that India and China will need to replace 1.5Mbd combined. The logistical challenges posed by sanctioned Russian vessels, along with issues for crude sellers Surgutneftegaz and Gazprom, have made the situation riskier. Additionally, sanctioned insurers Ingosstrakh and Alfastrakhovanie are critical for both P&I coverage and cargo insurance. This has turned moving Russian barrels into a considerable challenge. Despite these issues, some stranded vessels discharged near Shandong port after idling for days. The real problem for Moscow isn’t the vessels themselves but ensuring payment for their crude. Iran’s example—50 million barrels trapped in Chinese storage since 2018 without payment—looms large.
While payment issues remain unresolved, India and China continue their scramble for medium-sour barrels, pushing the Dubai cash premium above $5/bbl. Buyers are now reaching westward to secure supplies from West Africa, Latin America, and the US. This flurry of activity is evidenced by UNIPEC fixing 29 VLCCs predominantly from the Middle East last week, while India’s IOC issued rare purchase tenders for two million barrels. It seems they can’t get enough.
At the moment, the focus is on medium-sour grades and VLCCs, which have lifted the entire oil complex, though not to the extent expected given the magnitude of the sanctions.
Finally, there’s some good news from the Middle East. The much-anticipated ceasefire between Hamas and Israel has been announced. While the conflict's effects on the oil market were already diminishing, its partial resolution hasn’t significantly impacted markets. Attention remains on the Houthis and their activities in the Red Sea, which bear more influence on product markets than crude. Bearish sentiment has already affected tanker equities, and the market continues to focus on Russia and the US.
In the US, attention turned to the EIA’s report of another crude draw, with Cushing stocks nearing operational minimums. This raises the question: Will prices rise due to lower exports, or will refinery run cuts become necessary? Something has to give.
Additionally, the reemergence of discussions about tariffs on Canadian and Mexican oil has sparked fresh speculation. The idea of replacing cheap, accessible crude from neighbors with oil sourced 5,000 miles away seems improbable—but if it happens, tankers would certainly benefit.
Back to the oil market: The current movement feels overextended. Managed money positions are extremely long, suggesting that they may have arrived late to the party. However, there’s chatter that the OFAC list circulated as early as the previous Wednesday—two days before it went public. How this list leaked remains unclear, but activity in the Dubai and Brent windows last week indicates who may have had early knowledge.
To be fair, the rush to cover barrels began weeks ago, with India, China, and even some European refiners frontloading purchases ahead of spring maintenance. With storage economics making little sense, the question remains: Why the hurry?
I had my eyes on this chart for some time now, these are the oil’s market solely sources of growth, and they appear flimsy at best. Removing cheap Russian crude from India’s supply mix could significantly impact throughput. Meanwhile, the Chinese government’s crackdown on independent Shandong refiners, import quota restrictions, and differential taxation on fuel oil—combined with commitments to curtail Iranian flows—signal further tightening on the domestic front, trying to trim the fat from the refining sector and gain full control through state owned refineries.
Trade wars often escalate into currency wars, which, in turn, drive structural shifts in energy consumption. Looking ahead, oil markets are likely to remain volatile from a flat-price perspective. Hedge accordingly.
Now, let’s examine how the week unfolded in physicals.